Determining custody of the family business

On behalf of Wilson-Goodman Law Group, PLLC posted in High Asset Divorce on Friday, November 10, 2017.

A spouse's business is an important asset when their marriage ends, particularly in a high asset divorce. Knowing its worth even before divorce negotiations may be vital and helps assure that there is a fair buyout or sale to the other spouse.

An unbiased professional such as a forensic accountant should appraise the value of the business even if the other spouse is transparent. The appraisal should cover the value of equipment such as computers and any buildings and real estate that it owns. They should know the income that the business generates each year and its future growth potential.

The appraiser must be experienced and able to overcome numerous obstacles. For example, the business' records may not be up to date or it may have transacted business and loans on a handshake. The other spouse may have hidden profits or inflate the company's debts to hide its true value.

In a community property state such as Arizona, each spouse is entitled to half of all the assets such as the business that were acquired during marriage. It may be more difficult to divide a business that was started before marriage. Access to company records such as tax returns helps the judge determine fair division.

In businesses with several partners, a cross-purchase agreement usually allows partners to buy out the shares of the property owned by a partner who leaves or dies. In a divorce, the other partners may also choose to buy out a spouse's share or loan the spouse funds to buy it out. The partners may have also agreed on a method for determine the business's value, such as the profits from an earlier year.

The funds from the sale are tax free if a spouse purchases the business with a straight payment of cash within an Internal Revenue Service period. Where a promissory note is required because the spouse has insufficient funds for an immediate payoff, the time should be limited because the IRS may inspect a transfer of funds after one year from the end of the marriage in some circumstances. A spouse should also have collateral backing up the note that will default to their spouse if they default on the loan.

Determining the value of a business and keeping it running may be particularly difficult during the tension-filled time of a divorce. An attorney can help protect this interest.

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